Is Alcoa a Risky Investment?

With shares of Alcoa (NYSE:AA) trading around $8, is AA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Alcoa is engaged in the production and management of primary aluminum, fabricated aluminum, and alumina combined, through its participation in technology, mining, refining, smelting, fabricating, and recycling. Alcoa’s products are used worldwide in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. The company’s operations consist of four worldwide segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions. As economies worldwide expand, raw material suppliers like Alcoa stand to see rising profits. Growth in developing countries is key to a rising stock price for Alcoa, so watch that as this growth continues.

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T = Technicals on the Stock Chart are Mixed

Alcoa stock has not been a big positive mover over the last several years. The stock has been struggling as of late and may stay this way for the next few months. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Alcoa is trading above its flat key averages which signal neutral price action in the near-term, at best.

AA

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Alcoa options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Alcoa Options

33.06%

80%

79%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Alcoa’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Alcoa look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

44.44%

221.89%

-186.67%

-100.00%

Revenue Growth (Y-O-Y)

-2.88%

-1.52%

-9.13%

-9.45%

Earnings Reaction

0.00%

-0.21%

-4.60%

-4.10%

Alcoa has seen improving earnings but decreasing revenue figures over the last four quarters. From these numbers, the markets have not been too excited about Alcoa’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

How has Alcoa stock done relative to its peers, Aluminum Corporation of China (NYSE:ACH), BHP Billiton (NYSE:BHP)), Noranda Aluminum (NYSE:NOR), and sector?

Alcoa

Aluminum Corp. of China

BHP Billiton

Noranda Aluminum

Sector

Year-to-Date Return

-5.65%

-23.09%

-19.42%

-34.62%

-11.33%

Alcoa has been a relative performance leader, year-to-date.

Conclusion

Alcoa is a provider of aluminum products and services to companies operating in a multitude of industries worldwide. The stock has struggled, in recent years, and looks poised to continue this trend. Over the four quarters, earnings have improved a bit while revenue figures have been on the decline which has not excited investors in the company. Relative to its very weak peers and sector, Alcoa has led in year-to-date performance, albeit negative. STAY AWAY from Alcoa stock for now.

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